Can Apple’s big bull run be stopped by this little bearish ‘doji’ pattern?

The record bull run of Apple Inc.’s stock may have just ended, if a centuries-old bearish chart pattern plays out the way the textbooks say it should.

Technical analysts often say there is nothing more bullish than a record high, except the last one. Basically, bulls shouldn’t let the strength or length of a rally make them nervous. They should wait until the market sends a strong-enough signal to suggest the peak may have just passed. And Apple’s chart just did.

“To ignore a doji, with all its inherent implications, could be dangerous.”
Steve Nison, in the book “Japanese Candlestick Charting Techniques”

On Wednesday, the stock rose 0.4% to a third-straight record close of $135.51, which might seem bullish enough. But the details of how the stock traded intraday suggest a new short-term downtrend may be looming.

After a strong rally the previous session, when the stock opened at $133.47 and continued higher to close at $135.02, it gapped higher to open at $135.52 on Wednesday. After a seesaw session, in which the stock was up as much as 0.9% at an intraday high of $136.27 and down as much as 0.3% at a low of $134.62, the stock closed almost exactly where it opened, nearly the middle of the intraday range.

In candlestick charts, which were developed in Japan more than 200 years ago, that is a classic “doji” pattern, which translates to “at the same time.”

After a long rally, and right after a big gain, dojis are viewed as trend-reversal warning signs, as they imply indecision at a time that bulls should be most decisive.

FactSet

Steve Nison, who is widely known as the person who introduced candlestick charts to the West, wrote in “Japanese Candlestick Charting Techniques” — many candlestick chartists consider this their Bible — that dojis are valued for their ability to call market tops. If you throw a ball up in the air, the doji is the point where the ball freezes in midair, just before it starts falling.

“It takes the conviction of buyers to sustain a rally. If the market has had an extended rally, or is overbought, and then a doji surfaces — read ‘indecision’ — it could mean the scaffolding of buyers’ support will give way,” Nison wrote.

Apple’s doji also appeared in the middle of a wide-ranging day. Nison described that candlestick pattern as a “long-legged doji,” which he wrote was “an especially important doji at tops.”

Not only was Apple’s stock in an extended uptrend, a widely watched momentum indicator was well above its overbought threshold. The Relative Strength Index, which tracks how the magnitude of recent price gains compares with the magnitude of losses, is seen as suggesting an overbought condition when it gets above 70. On Wednesday, the RSI reached 89.95, the highest level seen since it hit 91.50 on Nov. 29, 2004.

Nison cautioned, however, that while dojis can be distinct trend-change signals, the likelihood of a reversal increases if subsequent candlestick patterns help confirm the reversal potential. A relatively big down day within the next few sessions help with that, but it is not necessary.

On Thursday, the stock slipped 0.2% in afternoon trade.

FactSet

“The philosophy is that a doji can be a significant warning and that it is better to attend to a false warning than to ignore a real one,” Nison wrote. “To ignore a doji, with all its inherent implications, could be dangerous.”

A similar textbook doji reversal appeared in Apple’s stock chart on Jan. 11, 2006, after an extended uptrend and a big up day, and with the RSI in overbought territory. Although prices edged higher the next couple of sessions, they turned sharply lower after that, and fell as much as 40% before bottoming six months later.

FactSet

If a reversal develops, some downside levels to watch include the price gap between the Feb. 1 intraday low of $127.01 down to the Jan. 31 high of $121.39, followed by previous resistance at the October highs between $118.36 and $118.69 and the April 2016 high at $112.39.

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